Market Analysis

OPPORTUNITIES FOR TEXAS INSTRUMENTS IN THE DIGITAL SIGNAL PROCESSING MARKET March 21, 2001 Duan Xu, Lizhi Charlie Zhong, Tim Dunn, Srinka Ghosh, Siddharth Sinha, Sumeet Solanki, Betty Yee, Opportunity Recognition: Technology & Entrepreneurship in Silicon Valley Andrew Isaacs Contents 1 2 3 4 5 6 7 8 Executive Summary ....................................................................................... 3 Introduction to Digital Signal Processing (DSP) ............................................. 4 2.1 Types of Chip Technologies (1,2) ...................................................................... 4 2.2 Development of DSP chips ................................................................................. 4 2.3 Function of DSP chips ........................................................................................ 5 2.4 DSP Market Overview ........................................................................................ 5 Future Trends ................................................................................................ 5 3.1 Power and flexibility ........................................................................................... 5 3.2 System-on-chips (SoCs)...................................................................................... 6 DSP Industry Analysis ................................................................................... 6 4.1 Strong Buyer Power ............................................................................................ 6 4.2 Weak Supplier power .......................................................................................... 6 4.3 New Entrants into the DSP Market ..................................................................... 6 4.4 Substitution threats.............................................................................................. 7 4.5 Key Existing Players ........................................................................................... 7 The Opportunity and The Player (VoIP & Texas Instruments) ....................... 8 5.1 Fundamental Demand Driver for VoIP technology ............................................ 8 5.2 Other existing networks embrace VoIP technology ........................................... 9 5.3 DSP and VoIP/Other Media Applications .......................................................... 9 Texas Instruments’ opportunity in VoIP ....................................................... 10 6.1 TI’s relative strengths ....................................................................................... 10 6.2 Challenges For TI in the VoIP market .............................................................. 10 Recommendations for TI ............................................................................. 11 References .................................................................................................. 15 2 1 Executive Summary Voice over Internet Protocol has the potential to change the way we communicate by converging text, voice and video in a cost effective manner. The market size and growth potential of VoIP has already started to influence the demand for the building blocks that enable the construction of this new data network. In this report, Digital Signal Processors (DSP) is identified as a significant beneficiary of this new communication platform. DSP’s have the appropriate programmable functions and characteristics that will be used to construct the underlying network as well as enduser terminals. Based on analyzing the current dynamics of the DSP industry and key players, Texas Instruments (TI) is poised to reap a lion’s share of the DSP market. TI holds the dominant market share and the capabilities to ensure its continued success in the DSP market. While Texas Instruments is well positioned in this space, it has to aggressively seek market share to preempt a host of powerful competitors. It needs to pursue this market share strategy through acquisitions, strategic partnerships and by building a compelling portfolio of DSP solutions for the VoIP market. 3 2 Introduction to Digital Signal Processing (DSP) The birth of Silicon Valley can be attributed to the phenomenal growth and importance of the semiconductor industry. In 2000, the global semiconductor market grossed over $200 billion. The semiconductor industry consists of several market segments that operate under their own unique competitive environments. These segments can be broadly categorized as shown in Table 1. 2.1 Types of Chip Technologies (1,2) Silicon-based integrated circuits for processing have developed into several technology categories that offer different compromises for a combination of speed, cost, flexibility and ease or speed of implementation. The categories can be broken down into four types: application-specific integrated circuits (ASICs), field-programmable gate arrays (FPGAs), digital signal processors (DSPs) and microprocessors (P). ASICs are designed and constructed for a particular function, and thus are very flexible from a designer’s point of view. However, once completed, the ASIC will have limited functionality, with low “overhead” of operation that translates to low power consumption. A higher level of post-completion flexibility is found in an FPGA device. The FGPA undergoes a one-time operation by the customer (designer) to fix the capabilities of the device. This allows greater flexibility of use after initial manufacture, however at a below optimal level of power consumption. A P provides the highest level of post-manufacture flexibility. It is a chip that can perform operations based on a range of software instructions. By changing the list of instructions, the function of the microprocessor will change. Consequently, the power demands are also highest for these devices, and increase as the complexity and speed increase. A DSP is a specialized processor that focuses on the computation-intensive functions encountered in transmission and manipulation of digital signals (data, voice, video, for example). Compared to a microprocessor, there is less flexibility in the DSP in terms of range of functionality. However it is optimized in terms of power and speed. In comparison to a P, a DSP will be faster and more power efficient for a given task. The power-flexibility relationship is shown in Figure 1. 2.2 Development of DSP chips Lucent Microelectronics (now Agere Systems) invented the single chip DSP in 1979. It has since focused on telecommunications applications, particularly cellular base stations. TI introduced the first commercially available DSP (the TMS320C10) in 1983. It has been the dominant supplier of DSP chips, as discussed later. The DSP chip has enjoyed sustained improvement at a rate typical of most integrated circuit technology. The benchmarks of clock cycle rate and millions of instructions per second (MIPS) have been doubling at least every 2 years. 4 2.3 Function of DSP chips These chips are specialized at processing signals encountered in the transmission and manipulation of digital data. These processes are typically encountered in a “real time” application, such as a cell phone conversations, and thus demand performance that does not interfere with, or slow down, the application. For example, when speaking into a digital cell phone, a DSP chip processes digitized voice data for transmission; it is used in reverse for receiving voice signal. If any delay or “back-up” of the DSP were encountered, the conversation would be unintelligible. The specialization designed into these chip make them capable of handling signals at speeds up to 10 times faster than microprocessors. 2.4 DSP Market Overview The DSP chip industry is a subset of the semiconductor industry. These are increasingly being used in a variety of different applications. In 2000, the size of the market was $6 billion, up from just $3.5 billion in 1998. Due to weakened market conditions, growth is expected to slow slightly from 45% in 2000 to 35% in 2001 (2). However, it will still be the fastest growing segment of the semiconductor industry, outpacing growth in microcontrollers and other types of chips. Figure 2 demonstrates the expected growth of the DSP market. The personal computer (PC) was the initial driver to the growth of the DSP chip industry. Its use was extended with incorporation into modems. Currently, the growth driver for the DSP market is the wireless communications industry. DSP chips are found in both cellular phones and in cellular base stations. Applications for which DSP chips are used are increasingly varied. Internet Telephony is emerging fast as a killer app in this industry. It is expected that Voice-Over-IP will begin to gain momentum and rival wireless by the end of the decade. DSP chips are also being increasingly used in massmarket products such as digital cameras and MP3 players. A third growth area for DSP chips is replacing micro-controllers in motor control systems. Within the semiconductor industry, there is a definitive trend towards lower power consumption and smaller footprints. Within DSP chip design, there is a trend toward developing more programmer friendly architecture while keeping the cost down. The suppliers and distributors are also building technical expertise in order to assist customers to transition from micro-controllers to DSP chips. 3 Future Trends 3.1 Power and flexibility The demand for flexible and low power consumption is feeding growth projections in the DSP chip market. Power is becoming the limiting factor for microprocessors because of battery drain and heat dissipation. Power and speed are indeed the differentiators for DSP chips. For example, these have replaced ASICs in the handset market as its speed and power consumption is getting closer to handset requirements. The flexibility advantage allows the same DSP to be used for different types of applications is enabling manufacturers to cut cost through economies of scale. 5 3.2 System-on-chips (SoCs) System-on-chips (SoCs) enable solutions which require smaller silicon area, higher performance, increased power efficiency, simplified software development and faster time-to-market for customers. These characteristics drive the OEMs demand for SoCs. Next-generation DSP-based products demand SoC solutions for applications like TVquality wireless videophones, digital home managers, and wearable health monitoring devices among others. There exists a fairly strong consensus that MPEG4 will be at the core of wireless networking for the future and SoCs constitute a core feature of it. MP4 is a standard defining ways to represent, integrate and exchange the next generation audiovisual information. Industry analysts believe that the growth of 3G mobile telephony could enable mobile video-telephony. Handset manufacturers perceive of these applications as differentiators from their competitors and a way of adding more value to their products. 4 DSP Industry Analysis 4.1 Strong Buyer Power The major group of customers for DSP chips are manufacturers of digital cellular phones, while the second largest group of customers is digital cellular base stations. By 2003, 70% of cellular phones that are sold will be replacement units (5). Subscriber rates still continue to grow, but the dominating growth driver is replacements. The market for cellular phones is projected to grow from $400 million in 2000 to $1 billion in 2003 (5). Another small but growing segment for DSPs is manufacturers of consumer mass-market products such as digital cameras and MP3 players. The overall affect of a small group of OEM customers is that buyer power in the DSP chip market is fairly strong. Under the Just-In-Time manufacturing model, buyers purchase DSP chips only when demands exist and it gives them a stronger price negotiation position. Another area in which we can see the demonstrated power of buyers can be seen in the following charts. Figure 3 shows an increasing trend in which DSP chips are tuned to a specific application. 4.2 Weak Supplier power The key customers in the DSP market have multiple competitors to choose from, which limit individual DSP supplier power. There is also a threat that purchasers of DSP chips can integrate up the value chain, and in some cases, is already occurring in the industry. For example, DSP chips are found in cellular phones. Motorola is a manufacturer of cellular phones and also designs its own DSP chips. 4.3 New Entrants into the DSP Market The threat of new entrants in the semiconductor industry is generally limited by large capital requirements. Existing semiconductor players are more likely to enter smaller, but faster growing segments like the DSP market. Newcomers to the industry include Xilinx, Microchip, Intel in a partnership with ADI. 6 4.4 Substitution threats ASICs could be tailored to reduce system cost, size and power consumption. OEMs might use these to gain a competitive advantage in the market. A DSP chip vendor that wants to meet the demands of these customers must enable ASICs to be derived from its architecture. The ability to offer customized versions will be key to proliferating the most popular DSP based systems. The major suppliers of ASICs are IBM and LSI Logic. The demarcation between chip categories is being continually blurred. As power, speed and flexibility are increased, chip categories become more substitutable for each other. Re-configurable logic like Field Programmable Gate Array (FPGA) is a serious threat to DSP. FPGAs are relatively new with a market share much less than that of DSP. While FPGA capabilities are still a subset of DSP functionality, they offer higher performance and lower power consumption. For high performance DSP functions, using FPGA in conjunction with a microprocessor is a significantly cheaper solution than several high performance DSPs, with higher performance. 4.5 Key Existing Players The four major players in the DSP industry are Texas Instruments, Lucent, Analog Devices and Motorola. These companies account for over 90% of market share. The distribution of market share is shown in Figure 4. The following is a brief discussion of the salient features of each company. Table 2 summarizes the strengths and weaknesses of each key competitor: 4.5.1 Texas Instruments TI is the market leader in the DSP chip industry and provides the widest range of digital chips. Its products range from low price to lower power and high performance. It treats DSP as a religion, pursuing the philosophy that they will take on any customer in any size market. It is the largest supplier to the wireless telecommunications industry; capturing the largest share in both the cellular phone and cellular base station segments. Its major customers include Siemens, Ericsson, Nokia, Sony and Samsung. TI has been investing in developing DSP chips that replace mechanical and micro-controller motor control systems. 4.5.2 Lucent Lucent invented DSP chips. Lucent recently spun off Agere as their DSP chip manufacturer. Agere is currently working with Motorola (Starcore). Agere’s philosophy, in seemingly direct contrast to TI is to focus on large, high volume customers only. 4.5.3 Analog Devices, Inc Analog Devices, Inc (ADI) has gained the most market share recently. It has recently entered an agreement to work with Intel. ADI has been investing in emerging markets. As with TI, ADI has been investing research money into using DSP chips in motor control systems in industrial applications. 7 4.5.4 Motorola Motorola uses its DSP chips in its own cellular phones and infrastructure products. Many of its potential customers are competitors, which hurt its sales of DSP chips. The focus of Motorola is on high-end audio products where performance is critical. As mentioned previously, Motorola is collaborating with Lucent/Agere in Starcore. With TI being such a dominant player, there has been little internal rivalry. However, with each of the other major players forming partnerships, the competition has increased. The partnerships give Lucent/Agere/Motorola and ADI/Intel the size and resources to compete with TI. Companies compete on price and performance, where performance factors include power consumption, size, flexibility and speed. 5 The Opportunity and The Player (VoIP & Texas Instruments) Voice over Internet Protocol (VoIP) represents a compelling emerging opportunity for Texas Instruments. The VoIP Gateway market in particular is projected to grow at a compounded annual growth rate of 229% and represents a market size of 1.8 billion (4). DSP chips are a critical component of the infrastructure the required to enable the explosive growth of Internet telephony. As the leading supplier of DSP chips, TI must and can capitalize on the demand generated by the various VoIP market segments. 5.1 Fundamental Demand Driver for VoIP technology The current telephone networks are based on circuit switching while the Internet is a packet switched network. Circuit switching establishes a dedicated connection from endto-end for the entire duration of the call. The concepts of circuit switching extend from the very roots of connecting telephones in the late 19th century, where telephones had to be in electrical contact, or a "circuit" in order to communicate. As calls were placed, operators manually pulled and inserted cables to connect two telephones for each call. 5.1.1 Limitations of Circuit Switching In packet switched networks, the data packets each have their own address, and the network routes individual packets to the destination address. These data packets each have their own address, and the network routes individual packets to the destination address. Although circuit switching guarantees high reliability and quality of sound, packet switched networks are beginning to offer comparable service at a much lower cost. The higher quality sound available today on the telephone network is achieved through an inefficient use of bandwidth. Packet switched networks are an order of magnitude more efficient at handling voice communication. This means the same "circuit" handling one traditional telephone call could potentially handle 10 packet switched telephone calls. In addition to better use of bandwidth, the equipment to support packet switched networks is both much lower in cost and much more flexible. The other limitation of circuit switching is that all of the intelligence in the network resides in the switches and not in the telephones or edge device. Circuit switches are essentially mainframe computers programmed with over 20 million lines of proprietary software. Compared to packet switched networks with personal computers at the edge, it 8 is very difficult and slow to introduce dramatically new features into traditional phone circuitry. This limitation of circuit switching will become even more important as customers demand greater functionality and features. 5.1.2 The Cost Advantage of Packet Switching The large cost savings offered by Internet telephony is fueling rapid growth in the global consumer market. Prices to call a telephone internationally from a PC are typically 70% lower than the best traditional international long distance rates. Even with all the advantages of the packet switched networks, the installed base for traditional telephone network in the form of analog telephones and central office switches will exist for a long time to come. However, as consumers and telephone companies seek lower cost calling with a greater number of features, calling traffic will be shifted from the traditional telephone network to the Internet. This shift is enabled through VoIP Gateways and so represents the most promising growth segment in the Internet telephony component market. 5.2 Other existing networks embrace VoIP technology 5.2.1 VoIP over cable systems Following AT&T’s acquisition of cable giants Tele-Communications Inc. (TCI) and MediaOne, the industry expects that VoIP over cable will provide a fast route for the long distance carriers to enter the local phone market, bypassing the uncooperative and entrenched local phone companies. VoIP over cable will require DSPs in every subscriber’s home. 5.2.2 VoIP over DSL Local phone companies are getting into the VoIP business, too. VoIP-over-DSL allows them to provide this service to several client phones over a single local loop connection. 5.2.3 VoIP over LAN Telecom equipment vendors such as 3Com are now offering enterprise-level VoIP-overLAN systems. These systems eliminate the need for traditional PBXs (as well as phone wiring to each desk) by using the LAN that is already routed to virtually every desk, anyway. 5.3 DSP and VoIP/Other Media Applications Internet telephony is currently used for speech and fax and will eventually also accommodate videoconferencing, providing a universal messaging capability. According to Merrill Lynch, the streaming media services market will grow as much as 74% annually through 2009. Paul Kagan Associates estimates revenues will top $12 billion by 2008. That universal capability requires DSP technology to be applied to every gateway dial-in access port for specialized functions such as speech compression, silence detection, echo cancellation and related tasks. 9 A standard DSP chip can handle about four dial-in ports at the gateway located at the service provider’s location. Millions of ports will eventually be deployed, and as those millions of ports are eventually updated to handle higher-bandwidth video traffic, they will ensure a robust long-term market for DSP chips. The emergence of large-scale streaming video over IP will drive the demand for multiple port gateways enabling parallel pathways. Currently, large organizations have a single port gateway to the public Internet through which all Web traffic must travel – shared pathway. This yet again generates demand for specialized DSP chips. Texas Instruments’ opportunity in VoIP 6 6.1 TI’s relative strengths Texas Instruments as a firm enjoys several advantages to capitalize on the emerging VoIP market. As an established and entrenched DSP producer, it has the manufacturing, technological and marketing capabilities to build better performing DSP solutions specifically for the various segments within the VoIP marketplace. Even as a large corporation, TI has historically been successful in adapting to the changing marketplace. As early as 1993, TI had the foresight to focus on the DSP market and now has a 48% share of the programmable DSP market (2). As a result, TI now has moved up the experience curve to hold a defensible lead in this space. TI’s successful track record in marketing programmable DSPs and building a large developer base in the industry can be leveraged to ensure that their products are adopted early and are able to capture a dominant market share in the VoIP market. As part of their aggressive expansion to the VoIP market, TI has already made significant investments in acquiring Telogy Networks, a VoIP software developer. In addition to the acquisition, TI recently announced VoIP specific solutions to address the VoIP Gateway, DSL, cable and handset markets. 6.2 Challenges For TI in the VoIP market As a large and dominant player (similar to IBM with PCs), there is a strong possibility that TI might not be able to identify, adapt and execute fast enough to capture the VoIP market. Recent alliances between Intel and Analog Devices as well as Lucent and Motorola are direct competitive threats that could derail TI’s move into the VoIP market. Furthermore, even though DSP technology is well suited for VoIP applications, it is not a must-have solution for this market. The emergence of System on a Chip may well replace or reduce demand for DSP chips in the VoIP space. 10 7 Recommendations for TI Our recommendations for TI are threefold. (1) Increased awareness and identification of disruptive technologies (DT). This essentially dovetails with TIs current practice of allocating its sales resources to spot trends of DT, by tracking the movements of its 40K mass-market customers. The policy extends to launching an in-house unit (but not a spinoff) for supporting an application for a market deemed sizeable. However, the metrics used internally for ascertaining market size remains unclear. TI also leads an initiative through its new business group, to identify and develop new applications for its DSP chips, in conjunction with 3rd party developers. (2) In view of TI’s positioning for entering the potentially lucrative VoIP market, it should leverage it assets to either strike strategic alliances with other giants or potentially integrate the smaller players through acquisitions. VoIP gateway manufacturers, for example: Nuera Communications, Cisco Systems and Clarent are potential candidates. The primary issues that gateways are required to address comprise scalability, high channel density voice quality latency, bandwidth consumption, redundancy fail-over among others. These entail potential enhancements of the DSP architecture. The explosive growth of the IP appliance segment, which includes IP phones, is a direct consequence of the fastest growing market in global communications. Partnership with stand alone IP-phone vendors, primarily the ones driving the interoperability among VoIP products, like, Pingtel and Symbol Technologies also deserve mention. According to Miercom analysts (network consultancy: Princeton, NJ), proof of interoperability in the public domain would become the primary metric for gauging the feasibility of VoIP. Alliances with carriers, for example AT&T and Sprint, as well as with Quality of Service managers, Lucent Technologies for instance might consolidate TI’s base. Successful positioning within this emergent industry will facilitate TIs transition to simultaneous transmission of audio and video, or media over IP (MoIP) - potentially the killer app for IP. (3) Finally, many believe, that the growth of the 3G mobile telephony will trigger video telephony and potentially MoIP. Handset manufacturers who perceive of the above applications as product differentiators will drive the demand for system-on-chips. SoCs have the potential of solving major pain for OEMS, in that it enables them to update feature and function with a simple software download eliminating hardware overhaul. Companies, for example: Triscend, LSI-Logic through their partnerships with Hitachi, IBM are currently investing behind R&D of SoC technology. Although TI has made some forays into SoC development in partnership with Sony, its positioning in this segment will be solidified thorough a collaborative and/or acquisitive growth with other chipmakers as opposed to a purely organic one. 11 P DSP FPGA Power ASIC ASIC: Application Specific Integrated Circuit FPGA: Field Programmable Gate Array DSP: Digital Signal Processor µP: Microprocessor Flexibility Figure 1: Relationship of chip-types as a function of power consumption and final-use flexibility. DSP Revenues 25 20 Revenue ($B) 34.7% CAGR 15 10 5 0 98 99 00 01 Year 02 % Change 03 04 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Revenue ($B) Figure 2: Expected growth of the DSP market (3). 12 % Change Figure 3: Increasing trend in which DSP chips are tuned to a specific application (3). DSP Market Share (1999) 5% 10% TI Lucent Analog Devices Motorola Other 11% 49% 25% Figure 4: The distribution of market share in the DSP industry (3) 13 Market Segment Discretes Optoelectronic Analog Circuitry Microprocessors Microcontrollers DSP Microperipherals Custom Logic Memory Bipolar Digital Total Size ($ Billion) in 2000 17.5 9.7 30.6 30.2 12.5 6.5 11.3 31.1 51 1.1 201.5 Growth Rate in 2000 (%) 30.6 67.2 38.5 11.0 28.9 47.7 8.7 48.1 60 6.4 36.9 Table 1: Market segments in the semi-conductor industry (2). Company Texas Instruments Strengths    Weaknesses  Lucent/Agere      Analog Devices, Inc. Motorola Market leader Focus on DSP Adaptability: ability to shift technical focus in the past - from memory to DSPs Strong R&D Partnership with Motorola helps it to compete with TI Good R&D Partnership with Intel helps it compete with TI Partnership with Lucent/Agere helps it compete with TI Focus on DSP leaves it vulnerable to developments in other technologies  Slow to market    Broad focus in product range Demonstrated difficulties in switching tech focus Many of its potential customers are competitors Table 2: Strengths and weaknesses of the major players in the DSP Industry. 14 8 References 1. TI raises bar with new DSP families, Darrell Dunn. Electronic Buyers News, page 34, Feb. 28, 2000. 2. Primer on Semiconductors, SG Cowen, 3rd Ed. Jan. 2001. 3. Forward Concepts – www.forwardconcepts.com 4. Frost and Sullivan Market Research – www.frost.com 5. "DSP Firms Have a Big Market to Exploit", Economic Times, January 1, 2001, Bennett & Coleman 6. "DSPs Recorded a Bonanza 2000, But Prospects For This Year Not As Clear", Electronic Buyers News, January 1, 2001, CMP Publications, Inc. by Darrell Dunn 7. "Explosive Growth Draws New Players to DSP Markets", Electronic Buyers News, November 20, 2000, CMP Publications, Inc., by Darrell Dunn 8. "Deep in the Heart of Texas Instruments", Electronic Business, October 2000, Cahners Business Information, by Svetlana Josifovska 9. "Encyclopedia of Emerging Industries, Semiconductors", OneSource Information Services, Inc, 1999 10. “ Is streaming video dead?”, ZDNet , March 2001, Chris Wallace 15